Amex Gold Miners Index Review

Barron's - Monday, December 20, 2004
These forecasters expect a dollar comeback, but they also see a flight to safety
-- including gold - By Sandra Ward

An Interview With Bob Hoye and Ross Clark -- Clark's technical charts
speak a thousand words. But if you still have trouble interpreting them, collaborator
and senior strategist Hoye at Institutional Advisors, an independent market
research and forecasting firm founded in 1980 and based in Vancouver, British
Columbia, readily puts them into context with his lively daily and weekly commentary
for institutional traders, hedge funds and chief investment officers.

The two focus on alerting investors to important market trends that present
significant moneymaking opportunities, with special attention paid to interest-rate
movements, the major stock-market indexes, base metals, gold and oil. Their
calls tend to be uncannily correct, whether it's been predicting the stock-
market bottom in October 2002, the seasonal rally in the stock market this summer
or the new bull market in gold. That's why their forecast for a dollar rally
is generating excitement and why their broad outlook for an eventual flight
to safety seems so scary.

Barron's:I'm interested in your notion that the world is long inflation
and short the dollar.

Hoye: That's where the main speculation has been. It is important to
know that by inflation we don't mean the rate of change of the CPI [consumer-price
index], but inflation in stocks and bonds, energy and industrial commodities.

Some think it's a sign of tightening that the Fed has increased the fed-funds
rate four times. But the money supply is still growing. Speculation has become
so intense that short rates have been going up because of the demand for speculative
money. I doubt that the Fed would ever deliberately tighten, because they want
to keep the party going.

Q:So you're saying the Fed isn't in charge of our destiny?

Hoye: It is all in the hands of the speculators. The market never accommodates
the desires of the crowd, and we would include central bankers among the crowd.

Sentiment
figures for the stock market, by many measures, show extreme bullishness. The
Investor's Intelligence survey just popped up to a multiyear high. Sentiment
as applied to the dollar index shows only 5% bullishness. Being long stocks,
bonds or commodities is all a way of being short the dollar, so to speak, especially
if you've borrowed to own it. If you borrow, you have got to pay it back, so
therefore you are short the currency you need to pay it back in.

Clark: From a technical perspective, I look at the strength of trends.
We do that on a daily, weekly and monthly basis. On a daily and monthly basis,
the U.S. dollar index has declined at a pace that has reached an extreme, matching
what we saw at each of the other interim bottoms since the index started trading
in the mid-1980s.

Hoye: The last time the index was in this condition was this past January,
before the dollar rallied to 92 from 84½.

Clark: Since 1985, we've had seven or eight such occurrences, and each
one has produced either a consolidation within a declining trend or has created
a very significant multi month corrective rally.

Q:Given the conditions, what do you expect this time?

Hoye: We would like to have the dollar quietly stabilize -- that would
be ideal -- and then later in January start to recover and end with some excitement
with an intermediate move to around 90.

Clark: There are two ways in which the dollar can come off the bottom,
historically, and they both start the same way. Typically, there is about a
four-to-six-day recovery rally off a significant bottom. We've seen that. The
relative-strength index got back to about 48 recently. Typically, in the first
stages of a rally, the relative strength of the dollar will get to about 52,
plus or minus about three points, so it's within that parameter. It is also
back to the 20-day moving average, and this is the first thing you would expect
to see at the turn.

In the next week to 10 days, you would expect to see more choppy action in
the dollar after the recent directional move where the dollar recovered almost
every day. The choppy phase should take us through the approach of Christmas.
If it doesn't show a certain amount of strength, then it is probable it will
work its way back down and reach a new interim low by the end of January. From
there, we can stage a very significant rally.

Q:What's the second path the dollar might take?

Hoye: If the dollar can stay up in the next couple of weeks, it will suggest
the turn is clearly in place and a significant bottom has been made. That will
lead to a multi month rally right off these levels. Otherwise, a rally might
be delayed until we hit late January or early February before we are capable
of it. I'd love the dollar to become an item that is no longer in the headlines
and move back to page 3 or 4.

We are in the sixth great period of inflation in financial assets that started
in the 1700s with the South Sea Bubble. As in the past, the real price of gold
went down as the stock-market bubble blew out, then went up in the post-bubble
contraction. Also, the senior currency became chronically and relentlessly strong,
even after the bubble.

That's explained by the fact that the boom happened not only in the stock market,
but also in debt instruments, as players in the world's financial capital were
more than happy to lend money to emerging markets. The debt owed this time around
is payable in dollars. The Fed may want to inflate credit, but if everybody
is of a mood to pay down debt or avoid debt, then the Fed has a problem.

Q:Are we close to a day of reckoning?

Hoye: There was a series of speculative spikes earlier this year in
commodities and other sectors -- first in nickel, then the Baltic freight rate,
then grains, then silver.

All those faced a shakeout. Then the Nasdaq sold off. In late July, the market
prepared for another rally where the market would test all the previous spikes
or make sequential tops. The last to spike was silver, and the decline in silver
recently has been particularly brutal. One traditional sign of liquidity disappearing
is when silver plunges rapidly, relative to gold.

That is happening big-time. By the size of the drop in silver, somebody could
be terribly offside,and it may take a while before we know who blew it. This
is all reminiscent of other post-presidential-election periods. Of interest
is the 1972 pattern in the Dow Jones Industrial Average and the S&P 500,
which set one of the most important turn-of-the-year tops ever because what
followed the high in the first part of January 1973 was the worst bear market
since the 1930s.

Q:Déjà vu all over again?

Hoye: It looks similar.

Clark: If we take a look at the consolidation pattern we've been in
since the early part of the year, there are probably two dozen examples in the
last 100 years where we've come out in a very similar manner. A good percentage
of those can be found around a post-election stretch, such as we have now. The
move coming out of October was explosive, and the Dow, as we expected, reached
10,600 and the S&P hit 1194. That move didn't come on a single push. Such
moves work their way up, but slowly lose momentum and consolidate and make marginally
higher highs over a span of a few weeks to a month, which is what is going on
right now. The momentum move is behind us. Now there should be less momentum
on the upside. Support should be right around the 50-day moving average, which
is 10,300 on the Dow. On the S&P, support is at 1160.

We have bounced off the 20-day moving average on both indexes recently, which
is a perfect first test to have. Even if this rally has some legs and makes
a new high, it will just be a marginally higher high because we still have to
test support levels.

Q:What role does oil play, since that was an important feature in
1973-74?

Clark: Oil prices just happen to be coincident. When you look at individual
items, you can analyze them but as you put them together in a basket, whether
it be oil, the dollar or other assets, it is very difficult to recognize which
one at a given time is the primary driving force. It is like people trying to
rationalize budget deficits and currency moves, and it just isn't possible.
At given times, they run in concert with one another; other times, they don't.
It is similar to gold and the U.S. dollar: They run hand to hand about 25% of
the time, but it is the 75% of the time that everybody is aware of.

Interview -- Part II

A Rally for the Buck? -- Part II

Q:Does some of the momentum in the market you talk about correlate
with what is known as the Santa Claus rally?

Clark: Yes. I did some research with Dr. Bill Ziemba in the early 'Eighties
on this, and we put together a small-cap- versus-large-cap trade, which has
worked exceptionally well. The entry window is Dec. 15-17 and the exit should
be by the 8th of January. You have to be careful about finding entry points
for the Santa Claus rally and know your exits, just as you can't be a generalist
about what happens in presidential-election years.

You have got to look for specific characteristics that should be present at
certain turning points. So the last part of this week was where you would anticipate
finding a good low entry point for small-caps. You look for an oversold condition
in the market and then for that part of the market to show life once again.
If you get that characteristic, then you have more confidence to go with the
transaction.

If
there isn't a hard break, it means that positions through year end would have
to be of a smaller size than we would normally want. As we head into the seasonal
turn at the end of the year, if we don't get a rally of significance, we have
to read into that. That's what happened in Japan in January of 1990. Typically,
January was the best month of the year in Japan, and yet in 1990, January didn't
start on a positive note. That was the warning sign, and the market went into
a slide from then on.

Historically, there are a couple of failures that occurred from December highs,
and some of them are very similar to the makeup of the market right now. The
U.S. market in January 1973 is a prime example, and it happens to have also
been a climate where there were some very significant moves in commodities in
the preceding two years. The statistics over many, many decades suggest that
if there is a hot market going into the turn of the year, there is a good chance
it is a very important top. And by any measure, sentiment figures on the stock
market and sentiment figures on the lower grade bond market are about as extreme
as you get. There is also an old market saw about bull markets having a "copper
roof".

In the past 40 years, copper has set nine speculative highs, and seven of them
topped out near the turn of the year. The high, so far, for copper was 149.4
on Oct. 11. It has come down to 135 or 134, but it might pop up again with the
stock market.

Nonetheless, I think that also indicates a top.

Q:Where is the opportunity, then?

Hoye: In the government-bond market. In the three-to-five-year Treasuries.
We're looking for a bond rally to continue for at least the next few weeks.
But at some point, the general loss of liquidity in the financial markets could
eventually pull down treasury bond prices. On the lower-grade side of the bond
market, the loss of liquidity can be awfully quick.

Q:And the only other area you are positive about is gold?

Hoye: Yes. Everybody was looking at gold in dollar terms as the dollar
was crashing, but the price of gold until March was falling relative to commodities.
Placer Dome, a big gold producer, reported
a very disappointing quarter because their production outside of dollar terms
wasn't making any money. Our gold-divided-by-commodity index improved from 183
in March to a high recently of 244. A nice gain, but what's important about
it is the last time it came out of the doldrums and rallied was late September
2000, when it signaled there could be a contraction coming, and in November
the yield curve reversed. One of the worst things that could happen now would
be Treasury-bill rates starting to come down, which would steepen the curve.

The next step would be to have credit spreads between long Treasuries and high-yield
bonds start to widen. There is none of that yet, but we are watching for it.

Q:You talk about a loss of liquidity, but corporations appear to
be very liquid and some say that's bullish for the market.

Hoye: One of the things that really bothered policy makers in the 1930s
is that corporations and individuals who had money wouldn't spend it.

Q:How does China fit into your line of thinking?

Hoye: There was a big commodity mania in 1864 in Europe and England
and the United States. In the United States, it was particularly acute because
of the Civil War. Nine years later, the financial bubble blew up. As late as
1940, senior economists were still describing the 1873-to-1895 contraction as
"The Great Depression." At the time, the U.S. was enjoying tremendous
immigration and also a lot of movement from one place to another within the
United States. It was a very free economy. There was a change in iron and steel
production, and railroads were being built like mad everywhere, but it was all
within the context of a long contraction. An index of farmland values in England
from the time went down annually from 1873 without relief until the depression
bottomed in 1895.

The U.S. market was vulnerable to its own excesses, and it had some good booms
and good busts during the period. It was also vulnerable to the availability
of credit in the financial center, which was then London. Fast forward to China
today. Our conclusion is it will be subject to its own speculative excesses,
and it will also be subject to the availability of credit in the world financial
capital. I think the availability of credit is about to change.

The China boom is probably over, and you are going to have some form of a recession
there.

Q:And just what will make credit less available?

Hoye: The steepening of the curve will be the sign of a sudden flight
to quality. That flight to quality necessarily ends speculative liquidity wherever
it is.

In any financial disturbance, the sensible money goes straight to the most
liquid items, which in the past has always been gold or short-term Treasury
bills in the senior currency. I was absolutely startled earlier in the year
to learn that other senior central banks and Japan were buying U.S. Treasuries
as far out as 10 years, because that suggested they were speculating rather
than positioning for reserves.

What can happen, for example, is that the Bank of Japan could start selling
the longer Treasuries, but at the same time it might also be buying shorter-dated
Treasuries. So the effect on the dollar would be negligible, but it sure as
hell would steepen the yield curve.

Q:How are you advising people to position themselves for this scenario?

Hoye: We've been advising them to lighten up on lower-grade securities
and sell some of the pricey better corporates and to go to shorter-term Treasuries.
Big institutions have always got to own some equities, and they should be paring
the industrial cyclicals where there have been some huge gains. They should
trim their equity allocation to 50%, and if we get a sell signal in January,
that could be cut further to 40%.

We've been emphasizing gold because we're probably in a multiyear-long bull
market for gold. There is not much liquidity in gold shares, so the whole industry
is going to have to grow as more and more investors come into it. Also, prior
to 2000 there were five new financial eras, great financial booms, and in all
five examples the real price of gold went down and gold stocks didn't perform
well.

In all five examples, once the boom was over, a long bull market for gold started.

We can methodically identify an advancement group that is going to have a long
horizon ahead of it, and it is our duty to advertise that.

Q:But if the dollar isn't in such dire shape as you suggest, how
can that be good for gold?

Hoye: There's been a habit of thinking the last couple of decades that
the only way that gold can go up is if the dollar goes down.

For a real bull market in gold you have to have gold going up in the senior
currency. Why would it go up in the senior currency? Because of investment demand.
That investment demand in the past has been anticipated by a steepening of the
yield curve, as investors get out of longer-term Treasuries and into the shorter
end. The two most liquid investments in a flight to quality are gold and the
bill market in the senior currency.

Q:Are you an advocate of owning gold stocks or gold bullion?

Hoye: In gold, you will make more money out of the stocks than you will
out of gold. Following the 1929 market crash, Homestake Mining made a low of
81/8 while the price of gold was fixed at $20.67.

In 1932, gold was still at $20.67 and Homestake Mining shares were up about
135%. That proved that you can have a bull market for gold shares with no change
in the price of gold.

Q:But hasn't the price of gold been doing well while the stocks
have not?

Clark: That was because it was part of a currency play.

Hoye: The price of gold wasn't going up in Canadian dollars or euros.
To accept that gold can go up in senior currencies is difficult.

But again, you go back to any post-bubble period, and the real price of gold
has gone up.

Q:How significant is it that they've come out with gold exchange-traded
funds?

Hoye: It is an excellent tool for fund managers and for individuals,
and it provides liquidity. If we go into a post-bubble contraction and you own
gold ETFs, you gain purchasing power.

Treasure Chests is a market timing service specializing
in value-based position trading in the precious metals and equity markets with
an orientation geared to identifying intermediate-term swing trading opportunities.
Specific opportunities are identified utilizing a combination of fundamental,
technical, and inter-market analysis. This style of investing has proven very
successful for wealthy and sophisticated investors, as it reduces risk and
enhances returns when the methodology is applied effectively. Those interested
in discovering more about how the strategies described above can enhance your
wealth should visit our web site at Treasure
Chests.

Disclaimer: The above is a matter of opinion and
is not intended as investment advice. Information and analysis above are derived
from sources and utilizing methods believed reliable, but we cannot accept
responsibility for any trading losses you may incur as a result of this analysis.
Comments within the text should not be construed as specific recommendations
to buy or sell securities. Individuals should consult with their broker and
personal financial advisors before engaging in any trading activities. We are
not registered brokers or advisors. Certain statements included herein may
constitute "forward-looking statements" with the meaning of certain securities
legislative measures. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results, performance
or achievements of the above mentioned companies, and / or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Do your own due diligence.

Unless otherwise indicated, all materials on these pages
are copyrighted by treasurechests.info Inc. No part of these pages, either
text or image may be used for any purpose other than personal use. Therefore,
reproduction, modification, storage in a retrieval system or retransmission,
in any form or by any means, electronic, mechanical or otherwise, for reasons
other than personal use, is strictly prohibited without prior written permission.